Donald Trump doesn’t listen to big business. Unusually for a Republican president, he seems to be ignoring the business lobby altogether, as Edward Luce reported in the FT:
Groups such as the Chamber of Commerce, and the Business Roundtable, complain loudly about Mr Trump’s immigration crackdown, his tariff wars and government shutdowns. The White House pays scant attention.
At least, he’s not listening to the sort of big business that presidents have usually listened to. His business friends are different:
It is not as though Mr Trump lacks business friends. But they differ from the traditional crowd. Almost none run publicly listed companies. They tend to be property developers, private equity billionaires, casino magnates, and heads of family-owned companies. They swim in different waters to C-suite executives.
Perhaps this isn’t surprising as an increasing amount of the country’s wealth is now located in those waters.
An increasing share of US capital nowadays is going to private companies. Over the last two decades the number of US listed companies has almost halved. Initial public offerings are no longer the obvious route for private equity-funded companies. PE firms either hold their stakes for longer or sell them to other private groups. The rise of the megafund, meanwhile, has allowed public companies to go private. Amazon may have had to go public to reach the $1tn valuation it briefly touched last year. It is by no means clear that Uber or WeWork must follow suit. In each of the last eight years, the amount of equity withdrawn from the US stock market has exceeded the equity raised — a trend known as “de-equitisation”.
De-equitisation is the process by which shares and in some cases entire companies are ‘bought back’ and thereby removed from public trading. Norma Cohen wrote about “the death of the cult of equity” last year. She noted that in both Europe and the US, the value of shares being bought back has exceeded the value of new share offerings for some time.
Between 2000 and 2017 some $821bn of new equity was added to European markets via initial public offerings. That, though, has been dwarfed by the $4.96tn of equity withdrawn from the market, mainly in the form of share buybacks, divestments or as a defensive response to an unwanted suitor. A portion of that, $429bn, has been withdrawn through companies delisting.
In the US — where the $40.3bn value of IPOs last year, was the highest since 2014 — public market activity barely made a dent. Between 2000 and 2017 roughly $4.88tn was withdrawn, which compares with the total value of new shares floated at $697bn. Even emerging markets are not immune; the data show that since the turn of the century $3.79tn has been withdrawn. That has more than offset the issuance of IPOs totalling $1.26tn, with 2017 raising the most new equity capital for issuers in any year since 2010.
We are tired of hearing that there is nothing inherently wrong with buybacks. There’s also nothing inherently wrong with tequila, but take too much of it at the wrong time, and you’re probably making bad life choices.
In the last week both Bernstein and Goldman Sachs have predicted that buybacks in the US will either reach or exceed $1t in 2018. Investors have been eager to explain that this capital is not disappearing. It is merely rotating out of equities and into other assets. But this is just an accurate restatement of the problem: public markets are shrinking.
Furthermore, they argued, stock markets are becoming places where investors go when they want to get money out of a company, not when they want to put money in:
Increasingly, companies don’t list on public markets because they need the money. They list on public markets because their early owners want a liquid market for their own shares. The listing is not an entrance into big capital. It’s an exit for the big capital that’s already there.
Take Spotify, for example:
When Spotify listed on the NYSE earlier this year Daniel Ek, the CEO, published a letter that basically said “Meh.” He wasn’t ringing any bells or doing interviews, he explained, he was just going to keep doing his thing, because Spotify was not raising capital. We’re not calling Mr Ek out on this. He was just saying something in plain English that’s been true for years.
Could this be the start of a shift in the way capitalism works?
What we’re seeing now is that corporations have access to enough private savings of wealthy citizens that they’re walking away from the deal. The pace of this year’s buybacks are only a piece of that story.
Last year, asset management company Schroders published a report, What is the point of the equity market? It notes the ‘savage’ pace of de-equitisation and the corresponding rise of private equity:
The private equity industry has grown substantially in scale and accessibility and now competes much more acutely with the public market. Global private equity assets under management rose more than fourfold between 2000 and the middle of 2016 to $2.5 trillion4, a record high. Although still small relative to the $36 trillion market capitalisation of MSCI All-Country World public equity index, private equity has grown 2.5 times faster over this period.
An important development has been the ability of companies to raise sums of money privately that previously would not have been possible outside of public markets. Facebook raised $2.4 billion before its $16 billion IPO in 2012, Twitter $800 million before its $1.8 billion IPO in 2013 and Google a scarcely believable $25 million before its $1.9billion IPO in 2004. However, in just the past few years the figures have skyrocketed – Didi Chuxing, a Chinese transport technology group, has raised $17 billion privately and Uber $10.7 billion. The ability to raise such huge sums privately defers one potential need for a public listing.
This may sound like a dry and esoteric subject but the potential implications are huge.
Firstly, there is the question of transparency. The more business takes place in companies which don’t have to report their activities, the less we know about what business does and the less publicly accountable it is. People might complain about what quoted companies do but at least there is some publicly available information about their activities, even if journalists and regulators sometimes don’t spot it until it is too late.
Secondly, as one investment blogger mused, are companies only being sold publicly when most of the growth potential has already gone? The Schroders report raised a similar concern:
Public market investors are now accessing companies at a much later stage of their development than in the past, if they are able to access them at all. Given that growth is generally most rapid in those earlier years, it is highly likely that public market investors are missing out on returns as a result. Aggregate stock market returns are likely to suffer, with savers standing to be the biggest losers.
A former investment manager I spoke to recently told me that this is exactly what is happening. He was rather more blunt though. Investors, he said, essentially dump companies onto public markets when they have extracted most of the value from them. Given that we have an ageing global population that is reliant on stock market performance to pay its pensions, if stock markets are increasingly made up of stuff the rich don’t want any more, will they provide the returns necessary to support an increasing proportion of the world’s people?
And thirdly, what about corporate governance? Most of our corporate governance reforms of the past three decades have been aimed at encouraging a longer-term outlook and curbing the excesses of public companies’ managers. Having realised that there is a limit to the impact non-executive directors can have, the UK government introduced the idea of shareholder stewardship. The Stewardship Code encourages institutional shareholders to act as joint stewards with company boards over the companies in which they invest. There is something almost quaint about this. Institutional investors with vast portfolios are even less likely to have an insight into what goes on in individual companies than the part-time non-executive directors are. But if the highest value companies are moving out of the public sphere anyway, what’s the point of applying increased regulation to the ones that are left? Isn’t it like building a dam half way across a river?
It is still early days and, as the Schroders report said, equity markets are not finished yet. But a shift of capital away from public markets is bound to have ramifications for business and society. The global super rich eschew public health, public education systems and public transport. If they are checking out of public markets too, the 21st century variant of capitalism might turn out to be very different from the one we have been used to.
Many of us have tended to regard Donald Trump as a throwback, appealing to outdated notions of nationalism and elected by ageing voters with ageing ideas. But what if he and, more importantly, the people who support him, represent the future shape of western capitalism? Might his ascendency be another symptom of power shifting to a new type of corporate interest? Perhaps historians will remember Mr Trump not as a diehard reactionary but as the first private equity president, the logical result of shifts in wealth and power already evident by the early 21st century.